Background

On 30 March 2023, the Government published a Ministerial Statement outlining its response to the June 2021 consultation on the methodology used to set the SCAPE discount rate.

SCAPE stands for Superannuation Contributions Adjusted for Past Experience. It is the process for setting employer contribution rates at valuations of unfunded public service pension schemes.

A key component of the SCAPE process is the SCAPE discount rate. The SCAPE discount rate has been changed to 1.7% above CPI compared to 2.4% above CPI currently.

In recent years, CETVs from public sector pension schemes have materially understated the economic value of the benefits being provided and this change will bring CETVs quoted by public sector arrangements more into line with CETVs quoted by private sector defined benefit pension schemes and the cost of providing equivalent benefits from defined contribution (or money purchase) pension arrangements.

What impact will the change in the SCAPE discount rate have on CETV amounts?

A person’s pension entitlement is essentially an entitlement to a stream of future payments payable from the date that the person retires for the remainder of their lives.

A Cash Equivalent Transfer Value (CETV) represents the current value of this stream of payments.

As pensions are payable over many years into the future, the rate at which those payments are discounted, to produce a value in today’s terms, is highly significant to the calculation. Using a lower discount rate to value this stream of payments results in the current value of the stream of payments increasing and, consequently, the CETV also increasing.

The effect of SCAPE discount rate being reduced will be to increase CETVs.

How does the change in the SCAPE discount rate affect Pension Sharing Orders?

The change in the SCAPE discount rate will affect the percentage amount that needs to be applied to a Party’s pension benefits where a Pension Sharing Orders is payable from a public sector pension scheme. This is because the CETV against which the Pension Sharing Order is to be applied and the cost of the Pension Credit will both increase.

If neither Party has retired, and both Parties are assumed to retire at the same age:

• If both Parties are the same age, then the CETV and the cost of the Pension Credit will both increase by the same percentage and so the Pension Sharing Order percentage should be unaffected by the change in the SCAPE discount rate.
• If the Party against whom the Pension Sharing Order is to be applied is younger than the Party receiving the Pension Credit, the percentage Pension Sharing Order required to provide equal benefits will be lower than at present, since the value of the CETV will increase by more than the cost of the Pension Credit.
• By contrast, if the Party against whom the Pension Sharing Order is to be applied is older than the Party receiving the Pension Credit, the percentage Pension Sharing Order required to provide equal benefits will be higher than at present, since the value of the CETV will increase by less than the cost of the Pension Credit.

If both Parties have retired, the same principles as stated above apply.

If one of the Parties has retired and is in receipt of a pension whilst the other Party has yet to retire, or if neither Party has retired and the retirement ages at which the Parties are assumed to retire are different, then the outcome will be less certain as the calculations are more complex.

Stuart Faloon FFA

11 May 2023

Contact: stuart@aptadvisory.co.uk